May 2015

Self-fulfilling Runs: Evidence from the U.S. Life Insurance Industry

Nathan C. Foley-Fisher, Borghan Narajabad, and Stephane H. Verani


The interaction of worsening fundamentals and strategic complementarities among investors renders identification of self-fulfilling runs challenging. We propose a dynamic model to show how exogenous variation in firms' liability structures can be exploited to obtain variation in the strength of strategic complementarities. Applying this identification strategy to puttable securities offered by U.S. life insurers, we find that 40 percent of the $18 billion run on life insurers by institutional investors during the summer of 2007 was due to self-fulfilling expectations. Our findings suggest that other contemporaneous runs in shadow banking by institutional investors may have had a self-fulfilling component.

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Keywords: Shadow banking, funding agreement-backed securities, life insurance companies, self-fulfilling runs


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Last Update: June 19, 2020